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Article

Commercial Mortgages: An Alternative to Long Corporate Bonds for Pension Plan De-Risking

Xisuo Louis Liu
The Journal of Investing Winter 2016, 25 (4) 134-141; DOI: https://doi.org/10.3905/joi.2016.25.4.134
Xisuo Louis Liu
is a managing director and fixed income quantitative strategist at Wellington Management in Boston, MA.
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  • For correspondence: lxliu@wellington.com
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Abstract

High-quality, long-duration commercial mortgage-backed securities (CMBS) are worth consideration by corporate defined-benefit pension plans that are shifting asset allocations from equities to fixed income for de-risking. The author’s research suggests that high-quality, long-duration CMBS can be a viable alternative to long corporate bonds in a plan’s fixed-income allocation, given the sector’s growing market size, more stable and predictable cash flows, reasonably high correlation to long-duration corporate bonds, and relatively low default risk. An allocation to AAA-rated long CMBS can also diversify and mitigate the issuer concentration risk inherent in allocations to high-quality, long-duration corporate bonds, particularly for larger plans. For plans with allocation to equities, adding high-quality CMBS can reduce funded-ratio risk at the plan level, because these securities are less correlated than corporate bonds to equities.

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The Journal of Investing: 25 (4)
The Journal of Investing
Vol. 25, Issue 4
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Commercial Mortgages: An Alternative to Long Corporate Bonds for Pension Plan De-Risking
Xisuo Louis Liu
The Journal of Investing Nov 2016, 25 (4) 134-141; DOI: 10.3905/joi.2016.25.4.134

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Commercial Mortgages: An Alternative to Long Corporate Bonds for Pension Plan De-Risking
Xisuo Louis Liu
The Journal of Investing Nov 2016, 25 (4) 134-141; DOI: 10.3905/joi.2016.25.4.134
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  • Article
    • Abstract
    • CONCENTRATION AND CREDIT RISKS IN LONG CORPORATE BOND INDEXES
    • LONG-DURATION, HIGH-QUALITY CMBS: KEY CHARACTERISTICS
    • ADDING AN ALLOCATION TO CMBS: IMPACT ON FUNDED-RATIO RISK AT THE PLAN LEVEL
    • IMPLEMENTATION OPTIONS
    • CONCLUSION
    • ENDNOTES
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